Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 23 November 2012 at 11:10 GMT

Gap, TJX and Coach to deliver strong sales during holiday season

Partner - Senior Portfolio Manager / PP Capital Asset Management
Denmark

Holiday season is the most lucrative sales period for retailers. The second most important season is the ‘back-to-school’ season in the third quarter when shoppers stock up on clothing and school supplies for their children.

Historically, the correlation between the sales growth of the two periods is high as the back to school season tends to capture customers' willingness to buy products which then often correlates with holiday season sales. Using such correlations we should expect the clothing and accessory category to outperform others (table 1) this holiday season.

Correlations

During this year's ‘back-to-school’ season, the clothing and accessory segment increased its sales by 5.4 percent over last year's. With a correlation of 0.716 to the holiday season, clothing and accessories should have a promising outlook.

Hot prospects in Q4
Looking at several large US clothing and accessory retailers that have reported same-store-sales (SSS) including the months of August and September, the prime season of ‘back-to-school’, we see a few hot prospects for Q4, assuming the correlation holds for this year’s holiday season.

Clothing & Accessory Stocks

One stock sticks out negatively -  Abercrombie & Fitch (NYSE:ANF). The company is struggling to increase its comparable sales, with most of its revenue growth coming through expensive expansion. Due to significant mark-up on its products the company’s gross margins look good, but its high operational expenses are reflected in thin net margins.

On the positive side most of the other clothing and accessory retailers could have solid holiday sales. As my colleague Matt Bolduc has pointed out a few times (Post-1, Post-2, Post-3), Coach (NYSE:COH) is a very hot prospect, not only for the holiday sales but also for the longer term. Coach has done well historically growing its sales, has very strong margins and comes at a lower price than other stocks on the list.

Both TJX (NYSE:TJX) and Gap (NYSE:GPS) have seen a strong momentum in demand for their products. Both companies have continuously delivered positive earnings and sales surprises to the market this year, and are highly likely to repeat such in the fourth quarter. Gap is currently the highest performer of the apparel category and analysts still believe there is a potential for another 12 percent upside.

Less likely to perform
Based on the correlation pattern, the bottom performers for the fourth quarter are likely to be the department stores. This category holds stocks like JC Penney (NYSE:JCP), Macy’s (NYSE:M), Kohl’s (NYSE:KSS) and Sears (NASDAQ:SHLD). I have previously highlighted JCP as a struggling candidate for the holiday season as its new pricing strategy continues to confuse customers who seem to be doing their shopping elsewhere. Kantar Retail recently presented a study showing that nearly 10 percent of J.C. Penney’s shoppers have moved elsewhere, benefitting Macy’s, Kohl’s and even Wal-Mart (NYSE:WMT).

Industry's earnings outlook looks promising in Q4
Overall, retail is expected to deliver strong earnings growth in Q4. With apparel retail being at the top, chart two illustrates even more strongly that this segment is expected to be a strong performer in fourth quarter.

Exp. Q4 EPS Growth

So, if the strong correlation as well as analysts’ earnings expectations in Q4 play true, the industry will trade at higher levels. There are two ways to play this, either buy an ETF on the retail industry or pick your own stocks. Personally I would stick to stock picking to avoid the ‘Abercrombies’ of the industry. To me, Gap, TJX and Coach look the most promising ones.

 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail